Business-related Service Providers: Upswing Continues/Preparation for the EURO in the Early Stages

The economic upswing in the business-related service sector also continues in the second quarter of 1998. The situation concerning revenue, demand and employment has improved in comparison to the previous quarter as well as to the same quarter one year ago. However, the upward development is weaker than in the first quarter of 1998. Nevertheless, the boost in Western German domestic demand and the slight improvement of the overall economic situation in the new federal states suggest that the business cycle has not yet reached its zenith in the case of the business-related service providers. The entirely positive expectations for business-related service providers indicate a further upswing in autumn 1998. There are major shortcomings in the preparation for the EURO. Roughly five months before the monetary union, only very few business-related service providers have taken concrete preparatory steps.

This is the result of a representative survey carried out by the Centre for European Economic Research (ZEW) in Mannheim, in collaboration with the "Verband der Vereine Creditreform" in Neuss, in December 1997. The economic sector of business-related services encompasses tax advisors and certified public auditors, business consultants, architects, technical consultants and planners, vehicle renting, machine renting, forwarders and logistic firms, software providers, advertising agencies and waste management firms.

Upward Trend Continues

The continuous upward movement for business-related service providers has remained stable since mid-1996. The positive development regarding the assessment of revenue, demand and employment is continuing in the second quarter of 1998. Seasonally adjusted, the expectations concerning revenue have even reached the same level as the all-time high from the second quarter of 1995. The strong revenue performance has positive repercussions on the labour market. For the fourth quarter in a row, firms hired more staff than they released. The demand situation was equally expected to improve in the second quarter. Though, seasonally adjusted, turnover expectations had come near the all-time high from the second quarter of 1998 at the beginning of the year, they have now toned down slightly.  

Cooling off in Eastern Germany

Though in the previous quarter, signs of stabilisation had begun to materialise in the new federal states, their economic situation has now once again weakened. Particularly the revenue and turnover situation is evaluated far more critically than in spring. Eastern German economy continues to suffer from the weak state of the construction industry, which is not expected to provide any positive impetus in the medium-term. Problem children are therefore architects and technical planners, as well as sewage and waste disposal contractors, who are battling with significant overcapacity.

On the contrary, the situation for forwarders and logistic firms, who have strongly prepared themselves for international competition in the previous years, is continually improving in the course of the increasingly powerful economic upswing. Although the ban on cabotage was lifted on July 1, 1998, the economic expectations for this industry remain favourable for the autumn quarter of 1998. The advertising industry is likewise on a path of growth at the moment. Business consultants and software providers continue to be industries which are absolutely booming, since the switch to the EURO as well as the turn of the millennium comes as a great benefit to them.

Halting Preparations for the EURO

Even though a great number of surveys have indicated a lack of preparedness for the EURO among German businesses so far, software providers and business consultants enjoy a continuing boom. According to analyses conducted by the Association of German Chambers of Commerce and Industry (Deutscher Industrie- und Handelskammertag, DIHK), 43 per cent of German businesses had not yet taken any preparatory steps for the EURO. Admittedly, business-related service providers are better prepared than the German industry average: merely about 18 per cent of the firms have not yet taken any preparatory steps. However, roughly five months before the launch of the monetary union, only one-tenth of business-related service providers have taken the first concrete measures towards the conversion. 40 per cent have not yet gone beyond the preliminaryconsiderations. One quarter of the firms has fixed ideas about adjustment requirements and eight per cent have set up task forces. The overall small amount of preparatory steps taken comes as a surprise, since almost 90 per cent of business-related service providers see a need of adjustments in the business process. After all, with a share of more than 70 per cent of firms, the participation in preparatory seminars has almost tripled compared to summer 1997. Progress is also being made in the technical preparations for the currency changeover. With a share of 30 per cent, nearly twice as many firms as in the previous year have at least prepared technical measures for the currency changeover.

East German Business Lagging behind

Software providers, business consultants, and machine renters are comparatively well prepared for the monetary union. Those lagging behind are in particular technical planners and consultants who in many cases have not yet dealt with the matter at all, probably because these sectors mainly focus on regional markets. In like manner, architects as well as technical consultants and planners are lacking financial resources due to the difficult economic situation. Waste management firms equally lag behind in their preparations for the EURO.

Regarding preparations for the EURO, business-related service providers from the new federal states lag far behind their Western German competitors. The reasons for this are their weak orientation to export and the poor economic situation. Differences also prevail between businesses of various sizes: firms with fewer than 50 employees are considerably worse prepared than larger firms.

Changeover – but when?

About 30 per cent of business-related service providers are planning a changeover to the EURO in the course of the year 1999. One quarter are targeting a changeover in 2000, while 17 per cent are planning to switch to the EURO in 2001. Even though June 30, 2001 was named the final deadline for the EURO changeover, one third of the firms have not yet decided on a conversion date. First and foremost, large businesses have set their dates as early as 1999. The same applies to more than one third of forwarders and logistic firms as well as software providers. With about 8 per cent, the share of architects and technical planners is considerably smaller.

Costs and Benefits

Many businesses postpone the EURO conversion for reasons of costs. 40 per cent of businesses expect adjustment costs of less than half per cent of their annual turnover. One quarter anticipate costs between half and one per cent, whereas 15 per cent of firms assume the adjustment costs to be higher than one per cent. In 1997, the average annual turnover was about DM 4 million.  

The majority of business-related service providers take a positive stance towards the new currency despite incurring adjustment costs. In the short-term, rather unsubstantial effects are expected. Only around one fifth of the respondents expect positive effects for the next three years, while 6 per cent anticipate negative effects to unfold. Over a ten-year period, however, as many as 30 per cent of the businesses are expecting the conversion to have positive effects. Benefits are particularly expected by software providers, tax advisors and certified public auditors, business consultants, machine renters as well as forwarders and logistic firms – sectors which are all well-prepared for the EURO. Architects and technical planners, as well as waste management firms, remain sceptical. The same applies generally to business-related service providers in the new federal states for they fear foreign competition, while at the same time they see little chance of entering new foreign markets.

Contact

Prof. Dr. Ulrich Kaiser, Phone: +49(0)621/1235-134, E-mail: kaiser@zew.de